NEW YORK--()--Fitch Ratings affirms the 'A' rating on Cameron County, Texas' approximately $7.2 million international toll bridge system (the system) revenue bonds. The Rating Outlook remains Stable.
In addition, the bridge system has an outstanding obligation of approximately $14.8 million to Cameron County relating to the system's pro rata share of the county's series 2005, series 2008 and series 2011 limited tax certificates of obligations. This obligation is on parity with the bridge system's revenue bonds.
KEY RATING DRIVERS:
MATURE EXISTING FACILITY WITH LIMITED EXPOSURE TO COMPETITION: The bridge system serves the sizable Brownsville-Harlingen service area with an extensive transportation network but faces some exposure to competition from neighboring international bridge facilities. Traffic and revenues are inherently susceptible to economic cycles on both sides of the border and the exposure of cross-border shopping trips to the Mexican economic and political conditions particularly since passenger cars constitute 57.7% of total traffic. Traffic declined for a fifth consecutive year, down 8.3% in fiscal 2011 (fiscal year ends Sept. 30) to 5.1 million total crossings.
MODERATE ECONOMIC RATE-MAKING FLEXIBILITY: Management's proactive position towards raising toll rates, which have contributed to stabilized toll revenues despite continued declines in traffic, is viewed positively by Fitch. The proximity of a competing facility limits economic ratemaking flexibility of the system to some degree.
CONSERVATIVE DEBT STRUCTURE: All outstanding debt is in a fixed rate mode with a declining debt service schedule, and good legal protections with backup pledges from Cameron County and participating cities to meet debt service.
LOW LEVERAGE AND STRONG COVERAGE LEVELS: The system's low leverage (1.32 times (x) net debt/cash flow available for debt service), adequate liquidity (with 431 days of cash on hand) and healthy debt service coverage ratio (with 4.04x total debt service coverage in fiscal 2011) provide significant cushion against volatility in traffic. While the system makes subordinated surplus transfers to the county and participating cities, these contributions pose little risk to financial flexibility.
MANAGEABLE CAPITAL EXPENDITURE NEEDS: The bridges are generally in good condition and funding of any future enhancements are expected to be predominantly grant based.
WHAT COULD TRIGGER A RATING ACTION:
--Negative rating action would be triggered by significant declines in crossings and revenue levels driven by considerable declines in manufacturing industry and cross-border trade activity and/or security concerns which could further restrict/slow border crossings;
--Changes in key financial metrics such as coverage and liquidity. Management's reluctance to raise tolls if necessary and inability to control operating and maintenance expenses;
--Meaningful additional leverage.
SECURITY: The outstanding revenue bonds are secured by net revenues of the Cameron County International Bridge System and a back-up pledge of a direct and continuing ad valorem tax, within the limits prescribed by law, on all taxable property located within the county.
CREDIT UPDATE:
Total crossings have declined over the past five fiscal years at a compound annual growth rate (CAGR) of -8.5%. Passenger vehicles and pedestrians contributed to approximately 58% and 36% of total traffic in fiscal 2011, while commercial traffic represented about 4% of total traffic. In fiscal 2011, total crossings decreased by 8.3% to 5.14 million partially due to toll increases implemented that year. Management did not indicate whether the bridges and surrounding areas have experienced any direct impact from cross-border violence, which has been restricted to Mexico. Nevertheless, Fitch notes that violence has affected traffic results by reducing the number of vehicles entering and exiting the U.S., particularly passenger vehicle traffic, which was down 12% in fiscal 2011. Commercial traffic has thus far been resilient, increasing 3% over the same time period; however, only 24% of total revenues were derived from commercial traffic compared to 61% derived from passenger vehicles.
Toll revenues have declined together with crossings (at -4.1% CAGR between fiscal 2006 and fiscal 2011), although the impact has been more moderate as the bridge system has instituted toll increases to mitigate the impact of traffic declines. Fiscal 2011 toll revenues were up 4.3% to $14.6 million, primarily as a result of Sept. 2010 $0.50 passenger vehicle toll increase and $0.10 pedestrian toll increase, which resulted in 4.2% increase in revenues from autos and a 13% increase in pedestrian toll revenues.
Management implemented another toll increase in September 2011, increasing tolls on commercial vehicles and for bikes and pedestrians. The first two months in fiscal 2012 (October and November) show crossings down 4.8%, while toll revenues were up 2.5% over the same time period in fiscal 2011. Fitch is unable to determine the proportion of traffic that may rebound as a result of improved economic conditions and/or security, but it will continue to monitor traffic performance and its impact on the system's financial results and economic ratemaking ability.
Management has been able to contain expenses historically, which grew at 0.14% CAGR over the last five fiscal years. Fiscal 2011 net toll revenues of $11.4 million provided debt service coverage ratio (DSCR) of approximately 4.04 times (x), with DSCRs ranging between 4.5x and 6.2x since fiscal 2005. DSCR declined as a result of higher debt service requirements as the system approaches its maximum annual debt service in fiscal 2012 of $3.2 million. Fitch views this level of cushion as necessary given the volatility in the traffic base that is tied to the performance of the maquiladora industry in Mexico and border security threats.
The system supports subordinated transfers to the Cameron County general fund, which equaled approximately $6.1 million in fiscal 2011 (42% of toll revenues). Though these transfers may prevent liquidity from accumulating within the system, they pose little risk to the system as they help drive toll increases and are subordinated to payment of operating expenses, debt service, and required fund deposits. The system's liquidity position is adequate, with $4.6 million of cash and investments in fiscal 2011 equivalent to 431 days cash on hand. Cash and investment balances have averaged $3 million over the last five years.
The system comprises three bridges located in the greater Brownsville-Harlingen area: the Gateway Bridge that was acquired in 1960, the Free Trade Bridge that opened in 1992, and the Veteran's Bridge that opened in 1999. While Cameron County is the sole owner of the U.S. half of all three bridges, other local municipalities participated in the two newer bridges by sharing in initial operating deficits with the benefit of also sharing in any surpluses as specified in the interlocal agreements. The interlocal agreement between the cities of San Benito and Harlingen and the county calls for surpluses, after the payment of operations and maintenance as well as 1.4x debt service on the bridge, to be split 25% each for the cities and 50% for the county. The Veterans Bridge shares surpluses evenly between the City of Brownsville and the county.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance,' (Aug. 16, 2011);
--'Rating Criteria for Toll Roads, Bridges, and Tunnels,' (Aug. 5, 2011).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648832
Rating Criteria for Toll Roads, Bridges, and Tunnels
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=646421
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